The Likely Failure of Obamacare After ‘National Federation’

The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America

By Edward Zelinsky

As virtually all Americans now know, the Supreme Court, by a 5-4 vote, sustained the Patient Protection and Affordable Care Act (“PPACA”). President Obama hailed the Court’s decision as confirming “a fundamental principle that here in America — in the wealthiest nation on Earth — no illness or accident should lead to any family’s financial ruin.” The President and his supporters tell us that PPACA will provide health care coverage to 30 million uninsured Americans. From the President’s vantage, the Court’s decision in National Federation of Independent Business v. Sebelius guarantees the desired expansion of health care coverage.

This superficial analysis of the Court’s decision is wrong. Two key elements of National Federation hobble the enforcement of PPACA. First, that decision eliminates the penalties for those states that decline to expand their Medicaid rolls. That decision also deprives Congress of the ability to enforce vigorously the individual health insurance mandate.

National Federation thus makes likely the failure of the President’s policies to expand health care coverage by eviscerating the enforcement of those policies. Health care coverage will increase somewhat because of the expansion of Medicaid and the individual mandate imposed by PPACA. However, in light of National Federation and the Court’s neutering of the penalties enforcing PPACA, the increase in medical coverage will be nowhere near the President’s aggressive goal.

Consider first the expansion of Medicaid, which provides medical services to low-income Americans and is administered and partially-financed by the states. Roughly half of the 30 million Americans whom the President forecasts will benefit by PPACA will receive their new health care coverage from the expansion of the Medicaid program. Since state participation in Medicaid is voluntary, the states need not expand Medicaid coverage as President Obama seeks.

To overcome states’ resistance to the costs of expanded Medicaid coverage, PPACA would have penalized any state rejecting such expansion by cancelling such state’s existing federal funding for its present Medicaid programs. For any state, this loss of its existing federal funding would be a financial disaster. Thus, it was likely, before National Federation, that all states would (however reluctantly) have accepted the expansion of Medicaid sought by President Obama to avoid the loss of their current Medicaid financing from Washington.

However, Chief Justice Roberts’s opinion in National Federation declares it unconstitutionally coercive for the federal government to withhold existing Medicaid funding from those states which refuse to expand Medicaid. In the Chief Justice’s terms, PPACA’s threatened termination of states’ existing Medicaid funding “is a gun to the head…[an] economic dragooning that leaves States with no real option but to acquiesce in the Medicaid expansion.”

By invalidating PPACA’s Medicaid penalty provision, National Federation makes the expansion of Medicaid a take-it-or-leave-it proposition for the states. Given their pressing financial problems, most states will leave it, as a state refusing to expand Medicaid coverage will now suffer no financial harm from that refusal.

While the states’ financial troubles are in part attributable to current economic circumstances, more fundamentally those troubles stem from the states’ underfunded pension and health care commitments to their employees. Neither those commitments nor the underfunding are going to be resolved anytime soon. While the federal government committed in PPACA to full funding of expanded Medicaid coverage in the early years of such expansion, the federal government made no such guarantees for the long-term.

Hence, financially-strapped states will now refuse to expand Medicaid coverage since, because of National Federation, there is no longer any financial penalty for such refusal. In contrast, proceeding with such expansion risks long-term costs the states are ill-prepared to incur. Had Congress been confident that states will voluntarily expand their Medicaid obligations, Congress would not have included in PPACA the financial penalty the Court has now invalidated.

The rest of the forecasted gain in health care coverage stems from the individual mandate, the requirement imposed by PPACA that most Americans have “minimum essential” health care coverage. A majority of the Court (including Chief Justice Roberts) declared that Congress lacks the power to enact the individual mandate under the Constitution’s Commerce Clause. A different majority (also including the Chief Justice) sustained the mandate as a constitutionally-permitted tax.

The media are largely treating this as a technical matter of little practical import. Not so: As a tax, Congress possesses limited authority to actually enforce the mandate.

The individual insurance mandate is a constitutional tax, the Chief Justice declared, because Americans without health coverage can pay the tax rather than obtain such coverage: “Under the mandate, if an individual does not maintain health insurance, the only consequence is that he must make an additional payment to the IRS when he pays his taxes.” And, the Chief Justice further notes, “for most Americans the amount due will be far less than the price of insurance.”

Even before National Federation, there were those who feared that many Americans would pay the tax rather than purchase health insurance. The Obama Administration itself estimated that four million Americans will choose to pay the tax instead of acquiring health care coverage. Chief Justice Roberts’ opinion invites Americans to do just this.

Because Congress precluded the IRS from using many of its standard enforcement techniques to collect this tax, many Americans will simply decline to pay the tax — without anything happening to them.

Prior to the Court’s decision, Congress, to bolster the mandate, might have augmented the penalties for not purchasing medical insurance. Congress, for example, might have considered declaring it a federal misdemeanor for an individual to willfully refuse to carry medical coverage.

However, National Federation precludes this kind of enhanced enforcement as beyond Congress’s authority under the Commerce Clause. Hence, the Court’s decision, sustaining the individual mandate as a tax but rejecting the mandate under the Commerce Clause, makes the future enforcement of the mandate less effective than it would otherwise be.

Some states will voluntarily expand Medicaid coverage. Some individuals will be prodded by the individual mandate to acquire health insurance. However, the quantum of increased coverage is unlikely to be anywhere near the President’s goals now that the enforcement of PPACA has been eviscerated by the Court’s decision in National Federation.

This is particularly bad news for the insurance industry. That industry had accepted the statutory obligation to issue health insurance to everyone at standard rates in return for the offsetting commitment that there would be 15 million newly insured individuals paying premiums for such insurance. Under PPACA and National Federation, the insurance industry is still stuck with the costly obligation to sell insurance to everyone at standard rates but now will not see all of the promised premiums, as many Americans will simply pay the tax to the federal Treasury.

At the end of the day, National Federation, if not quite a Pyrrhic victory, makes likely the failure of the President’s policies expanding health care coverage by eviscerating the enforcement of those policies. While health care coverage will increase somewhat because of PPACA, that increase in medical coverage will, as a result of the Supreme Court’s decision, be nowhere near the President’s aggressive goal.

Recent Comments

Alex Klein12th July 2012

Professor Zelinsky exaggerates the ease with which states can reject the PPACA Medicaid expansion.

Under the law, the federal government will at all times pay at least 90% of the new Medicaid costs. See 42 USC Sec. 1396d(y). Until 2017, it will pay 100% of those costs. So to reject the PPACA, state governors will have to explain to their uninsured citizens why they refused free (or 90% free) coverage. The risks are financial: citizens will move out of states that don’t offer expanded coverage, causing their tax bases to shrink. And the risks are political: the uninsured who remain are (more) likely to campaign against non-cooperating governors.

This isn’t to say some states won’t opt out. Some might, and some have already said they will. But easier said than done. This isn’t a state decision on whether to pay for uninsured people out of pocket; it’s about whether to accept giant sums of cash to simply hand over to those citizens.